Updated 8:38 pm, Friday, December 7, 2012

Hewlett-Packard has been a troubled company for a decade, with a revolving door for CEOs.

Hewlett-Packard has been a troubled company for a decade, with a revolving door for CEOs.

Photo: Justin Sullivan, Getty Images

HP breakup touted amid falling value

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Hewlett-Packard's value has plunged to less than the $31 billion it spent during a five-year takeover binge, the strongest evidence yet that investors would be better served by disassembling the maker of consumer laptops, printers and corporate servers.

Deals for Autonomy Corp., Electronic Data Systems, Palm and others built on the $17.6 billion purchase of Compaq Computer a decade ago, when Hewlett-Packard doubled down on personal computers. With the company failing to capitalize on a boom in demand for smartphones, tablets and cloud computing, fiscal 2012 sales fell, and analysts project declines for at least three more years. In the latest setback, Hewlett-Packard said it overpaid for Autonomy because of fraud, boosting last year's deal-related write-downs to $18 billion.

"All of this points to a company that's dysfunctional," said Brian White, an analyst for Topeka Capital Markets. "This whole mishap with Autonomy should be a wake-up call to do something. I think it's time," he said. "How much more pain can investors take before you understand that something needs to be done?"

The $27.2 billion company, valued at more than $100 billion in 2011, could boost a stock price languishing near a 10-year low under $14 to more than $20 by separating into two companies focused on consumers and business clients, UBS AG said. By jettisoning PCs and printers, Hewlett-Packard can reinvest that cash into the enterprise unit to enhance its software used for data centers, according to Topeka Capital.

Michael Thacker, a spokesman for Hewlett-Packard, said in an e-mail that the company remains committed to its current corporate structure.

"HP has some of the most valuable franchises in the technology industry," he said. "There are many advantages in one organization, including branding, go-to-market, supply chain, procurement scale, effective leverage of functional costs and collaborative R&D efforts. HP is committed to keeping our businesses and assets together. Our customers and partners tell us that's what they want."

A valley pioneer

Hewlett-Packard, a Silicon Valley pioneer founded in 1939 and now run by Chief Executive Officer Meg Whitman, remains one of the U.S. technology industry's largest companies, producing $120.4 billion in revenue during the past four quarters. Hewlett-Packard also has the second-worst-performing stock in 2012 among technology companies in the Standard & Poor's 500 Index, following a 46 percent plunge.

The company bolstered its position in personal computers by purchasing Compaq, a deal former CEO Carly Fiorina completed in 2002. While the transaction catapulted Hewlett-Packard to No. 1 in PCs over Dell several years later, Fiorina was ousted in 2005 after failing to generate the profits she'd promised.

Apotheker also agreed to buy Autonomy, a developer of data-mining software used by corporations. Hewlett-Packard now says that company committed accounting fraud. Autonomy's former CEO Mike Lynch has denied that. Hewlett-Packard wrote down the value of the Autonomy deal by $8.8 billion during the fourth quarter.

Hewlett-Packard's acquisition strategy has failed to boost its value, with the $31 billion spent since December 2007 on acquisitions exceeding the stock's current market capitalization. The company also has $35.6 billion in goodwill, the amount paid for acquisitions above the target company's asset value. That exceeds Hewlett-Packard's market value by $8.4 billion, more than any other U.S. corporation, data show.

"HP has been a serial disappointment and a case study in mismanagement, dreadful capital allocation and poor corporate governance," said Todd Lowenstein, a money manager at HighMark Capital Management. "The company is probably worth twice its current share price on a conservative appraisal of its sum-of-parts breakup scenario."

Hewlett-Packard needs to overhaul its board, because some of the current members are responsible for approving the Autonomy acquisition, and then split the company in two, said Topeka Capital's White.

Immediate fix

The personal computer and printer businesses could be spun off together or sold to a buyer such as an Asian computer maker like Taiwan's Acer or Asustek Computer, White said. The printer business, the stronger of the two, could help entice an acquirer and get a better price, he said.

A breakup would allow management to turn its focus to the enterprise unit and reinvest the cash to bolster its software offerings, White said.

"Why should the CEO have to wake up and spend any time thinking about the PC business when there's such a negative trend? Why wake up to a losing battle each day?" he said. "If they actually did some of these divestitures, they'd have more capital for acquisitions - but good ones."

Whitman has said the company reaps advantages by keeping its divisions together, including the strength of the Hewlett-Packard brand on PCs and advantages from buying chips and other components that can be used across computers, printers and servers. Whitman last year decided to keep the PC business, reversing Apotheker's plan to get rid of it.

Still, analysts see a diminished business should the status quo be maintained. Hewlett-Packard's revenue in the fiscal year that ended in October was down 5.4 percent from 2011, the biggest annual slump since 2001. Analysts' average estimates show a decline in each of the next three years.

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